Is Icosavax (NASDAQ:ICVX) In A Good Position To Invest In Growth?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Icosavax (NASDAQ:ICVX) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

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How Long Is Icosavax's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In June 2022, Icosavax had US$243m in cash, and was debt-free. In the last year, its cash burn was US$63m. So it had a cash runway of about 3.9 years from June 2022. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Icosavax Growing?

Notably, Icosavax actually ramped up its cash burn very hard and fast in the last year, by 174%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 19%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Icosavax Raise Cash?

Even though it seems like Icosavax is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Icosavax's cash burn of US$63m is about 47% of its US$133m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About Icosavax's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Icosavax's cash runway was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Icosavax (of which 1 is concerning!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.